As we approach the end of the year, charitable giving is once again expected to ramp up between Thanksgiving and December 31st, and we at Edgemoor would like to share some advice with any clients that wish to make donations. Although there is no wrong way to donate to charity, there are steps you can take to minimize taxes and maximize impact.
Gifting Appreciated Stock
You can avoid taxable capital gains if you donate appreciated securities that have been held in taxable accounts for at least a year. This is preferable to selling the securities and donating the cash proceeds, because you avoid realizing long-term capital gains while still getting the full deduction for up to the fair market value of the donated securities if you itemize your deductions. We recommend donating the securities with the largest capital gains to maximize the tax benefits of charitable giving.
Making Direct Donations vs. Funding Donor-Advised Funds
Appreciated securities may be donated either directly to charities or to a Donor-Advised Fund (DAF). DAFs are investment vehicles for giving to charitable organizations. Edgemoor offers DAFs through its custodians, Fidelity Investments and Charles Schwab & Co.
Appreciated stock donations to DAFs have several advantages:
- You can choose the charities that will receive grants from DAFs
- You can take the full itemized tax deduction upfront for donating to DAFs and then distribute the donated assets to the designated charities over time
- You can invest and grow your assets donated to DAFs if you wait to distribute them over time
- You can get help from DAFs to research charities, track your donations, and set up automatic recurring donations
Fidelity and Schwab both require a minimum initial balance of $5,000 for DAFs and provide lists of select funds for investment of donations pending their distribution to charities. For accounts exceeding $250,000 you can have your DAF funds managed by your investment advisor. Administrative fees for DAFs range from 0.10%-0.60% based on account size.
We at Edgemoor would be happy to provide allocation recommendations free of charge for DAFs invested in the lists of DAF select funds, or to manage DAFs exceeding $250,000. Setting up a charitable giving account through a DAF is easy, and Edgemoor is ready to prepare all forms and guide you through the process.
Donating IRA Distributions
Clients over the age of 70 ½ who have an IRA can donate up to $100,000 of distributions to charity instead of receiving it as taxable income. We recommend using funds from non-IRA accounts for donations above the Required Minimum Distribution amount. This strategy allows IRA assets to grow tax-free for as long as possible, ultimately increasing the funds available for future donations, expenses, and beneficiaries of Inherited IRAs.
Timing Your Donations
You receive the itemized tax benefits from giving to charity, either directly or to a DAF, in the year you make the donation. There is a maximum deduction you can take for charitable giving which is a function of your taxable income. Spreading out your donations over multiple years may maximize your tax savings. However, if you have a higher than usual income in a single year (e.g. from selling a family business), it may be best to make one large donation to a DAF to reduce your large tax bill that year, then distribute the funds to designated charitable organizations over multiple years.
If you wish to receive tax benefits in a certain year, the charitable organizations or DAFs must receive your donations by December 31st of that year. We recommend beginning to transfer assets at least several weeks before the end of the year to ensure the charitable organization or DAF can process your donations in time.
You should always consult your tax professional about your personal tax situation.
Contacting Edgemoor
If you have any questions, please feel free to call 301-543-8881 or e-mail us at gtruscott@edgemoorinv.com.
